South Africa has been consumed in the debate around the April Middle East conflict-related fuel price hikes.
The question that has been repeatedly asked is what can we do to mitigate this shock? The seemingly obvious answer right here and now is ‘very little’. Government did offer temporary fuel levy relief of R3/litre to reduce the magnitude of the fuel price increases, cushioning the blow for consumers.
Minister of Finance Enoch Godongwana estimated the temporary relief for April at around R6 billion in foregone tax revenue, small in relation to the total national revenue budget of around R2.3 trillion.
Nevertheless, every bit helps.
But even this small tax relief quickly leads to the question as to whether the country’s cash-strapped fiscus can afford it?
The fuel price shock highlights many structural problems in SA. For one, much can be done to improve the country’s transport energy efficiency. This is not only to ‘proof’ it against periodic oil price shocks, but also to contain ongoing energy costs in general and help make its economy more globally competitive, not to mention lowering South Africa's contribution to environmental damage.
The design of the South African city needs attention, its layout being arguably ‘sub-optimal’. Many low-income people live in townships far from places of work, meaning their transport costs relative to income are sometimes exorbitant. Changing urban design to bring more of the economy and jobs to those areas needs to be a priority.
South Africa's lack of good quality reliable public transport also comes into the spotlight during such times. It requires detailed planning. A transport corridor system, whereby the strategy is to promote densification along specific corridors, can create the mass demand for public transport on the corridors, which can potentially improve the financial viability of high frequency reliable public transport.
Then there is the potential role of ‘active transport’ – safe cycling and walking. These are the cheapest modes of transport, potentially ideal for people of all walks of life, rich and poor. Not only do these modes lower costs and reduce dependence on fuels, they have potential environmental, congestion reduction and health benefits.
But for now we still have to face the fuel price challenge. April fuel levy relief gives rise to a broader fiscal question around ‘approach’. Can the fiscus afford to cut taxes at all? Or, perhaps, can it afford not to?
However, all of these potential improvements around improving transport fuel efficiency require major investment in infrastructure. This investment is mostly in areas where government and state-owned enterprises assume responsibility, be it roads, safe cycling infrastructure or railways. But the lack of budget space to improve infrastructure is a seemingly never-ending fiscal issue.
This time, the crisis has much to do with road transport costs. But previously it has been about electricity, and currently ongoing is a rail and port logistics issue.
Often in these crises, a major part of the solution is an infrastructure one – much of SA’s infrastructure is ‘cracking’ due to a lack of renewal and expansions. And each time the severe fiscal constraints limit what can be done. There is currently very little space in public sector budgets for such infrastructure spend, suggesting a slow pace of change in urban and transport system design at best.
As a percentage of GDP, general government fixed capital formation recorded another very low percentage of 2.42% in 2025, according to SA Reserve Bank data. Government fixed capital formation as a percentage of GDP began its slide in the late 1970s, from a high of 12.23% in 1976, and has never significantly recovered.
Public corporations’ fixed capital formation reached a multi decade high of 5.5% of GDP in 1980, and has never recovered to such a rate again. In 2025 it languished at 1.6% of GDP.
So back to the earlier question, does government have the money to afford the fuel levy reduction to ease motorists’ pain at the pump? And can it afford any further relief? Has it really been able to afford any of the periodic crisis relief measures, or the ailing state-owned enterprise support measures, of prior years?
Simplistically, the very low rate of government saving available to fund much-needed infrastructure investment would suggest that it hasn’t. Its debt-to-GDP ratio has steadily risen over a decade and a half. This has led to interest payments on debt increasingly crowding out much-needed non-interest expenditure items, while social expenditure items consume a large part of the non-interest budget.
Perhaps a better question is, can government afford not to reduce taxation rates? Surely, any tax relief would just exert more pressure on the fiscal deficit and feed through into a still higher government debt burden? Not necessarily. Many reports point to huge scope for improvement in financial management and efficiencies in government.
Economist Arthur Laffer developed his theoretical Laffer curve to explain what he believed was the relationship between taxation rates and tax revenue. The theory is that, for some time, a government can raise tax rates and generate higher tax revenue. However, at some point raising tax rates any further would begin to generate less tax revenue, because of the dampening effect a high tax rate could have on incentives to produce economic output.
It's possible this theory is relevant for SA, and that the country’s net tax rate (gross taxation relative to the level of services received from government) may have reached that critically high level. Admittedly this debate is difficult to prove either way. If so, then any significant tax reductions may well be a boost for economic growth to a degree government may end up with more tax revenue than would have been the case without tax cuts, all other things remaining equal.
Without growth, SA seems destined to lurch from one shock to the next with little fiscal ammunition available to tackle it.
We can view the cause of the problem emanating from this petrol price shock in various ways. Certainly, the global oil price shock has suddenly caused petrol prices to rise, which has a direct financial impact on the consumer. But one of the reasons why this is such a problem is in part because SA has a lack of comprehensive and high quality public transport, along with safe active transport infrastructure.
A major part of the problem, too, is the low income level and lack of financial buffers among a large part of the population. Far better job creation is thus required. A petrol price shock would be far less troublesome were SA to be a higher income society with far less unemployment and poverty.
Tax reductions alone probably have limitations. The bottlenecks in certain public sector-dominated industries – electricity, transport and logistics, and certain local governments – need to be resolved rapidly, in many instances by opening them up to well-incentivised private sector entities that possess the capability and the means.
If the principle of the state largely being the regulator and the private sector being the deliverer of goods, services and infrastructure were to be pushed to a far greater extent (implying a smaller state), perhaps SA could afford to cut average tax rates to boost economic growth, job creation and ultimately grow its taxpayer base.
Therefore, while small in magnitude, even the April fuel levy reduction quickly raises the question of whether government can afford any such type of tax relief, so tight is its fiscal situation.
But perhaps a question to start asking more is whether it can afford not to provide such tax relief and far more, as part of a growth strategy aimed at growing the tax base?
